Financial experts see "psychic income," plenty of risk in stadium deal
by Jeff Horwich, Minnesota Public Radio
April 7, 2004

An artist's rendering of a proposed Twins stadium in Minneapolis. The city of St. Paul is also in the running. (Image courtesy of the city of Minneapolis)

Gov. TIm Pawlenty's plan for funding new stadiums for the Twins and Vikings has generated a mixed response at the Capitol. The two committees that have considered the plan have kept it alive without recommending passage, generally a sign of difficulty for a bill. The plan calls for the teams to contribute a third of the construction costs, with the rest subsidized through local tax increases and a portion of the sales and income taxes generated in or around the new facilities. Pawlenty calls this an "investment in our quality of life". We wondered what we might learn if it were the business world -- not lawmakers -- facing this investment decision. So Minnesota Public Radio took the stadium plan to some top financial professionals, and got a decidedly skeptical reaction.

Minneapolis, Minn. —
No one knows what a stadium financing deal will ultimately look like. Even if lawmakers give the OK, many specifics won't be settled for months.

But we do know that two modern, retractable-roof stadiums will probably run more than $1 billion. And we know that as much as both teams say they're dying to ditch the Metrodome, neither seems willing to foot the entire bill.

We brought the stadium pitch to David Joy -- chief capital market strategist for American Express Financial Advisors -- to see if this deal is somewhere he might put a client's nest egg.

"As a pure investment-related consideration, a project like this might fail the test," Joy says. His reason is simple: You're not likely to actually make any money. The current stadium plan does say taxpayers might see some unspecified financial return, but only if a team is sold.

It is hoped new stadiums might increase cash-flow from higher ticket prices, TV contracts, or fees from major companies to slap their names on the stadiums. But this cash-flow would go to the teams and owners.

Joy says the payoff for the public "investor" mostly comes in what he calls "psychic income": the pleasure locals take in their teams

"If you take a city like the Minneapolis-St. Paul area, I think clearly it considers itself a player on the national stage. And part of the identity that accompanies that is the presence of national sports franchises," Joy says. For Joy, who admits to being a baseball fan, psychic income might be enough to render the deal worthwhile.

But the misty promise of happiness and pride doesn't do much for Jeff Tollefson, head of the Minnesota Venture Capital Association, who says "the quick answer would be no, it would not fit the investment profile of most venture capital firms."

Tollefson says a venture capitalist always has a so-called "exit strategy": A way to cash out if things go well, or cut his losses if they don't. He says the stadium deal has neither.

Tollefson also says venture capitalists like to invest in people whose dreams are riding on that financial boost. "But if you're in a situation where you're looking at wealthier team owners, which is the case, clearly none of these guys are putting their life savings at stake, and it seems to be a little more like 'play money,' if you will. Many of them I think could afford to do more as individuals or as large families to continue to finance these operations," he says.

One more local expert sees a real problem with the veiled threat that teams might leave without a new stadium. Art Rolnick, research director at the Federal Reserve Bank of Minneapolis, says the teams have taxpayers "over a barrel" -- and that's no position from which to make an investment decision.

"'Extortionist' is not too strong a word for it, that's exactly what they're doing," Rolnick says. "And recognize (that) you're not necessarily done if you pay them off in 2004."

Rolnick is a well-known skeptic of public subsidies, and stadiums are no exception. He says like any investor, the state needs to consider risk and return. As for risk, Rolnick points to Milwaukee, where attendance at the $400 million Miller Park fell 40 percent last year from the stadium's opening year in 2001.

As for return, Rolnick says the state would see a better one from other investment options. "It's real clear investing in your workforce, the educational system is going to give you your highest return," he says. "So if you want to try to make a case that we should invest public money in sport teams, it really shouldn't be based on what's good for this economy. You're going to lose that debate."

But even Rolnick concedes the stadium decision goes far beyond this kind of rational number-crunching. In that case, his practical, business advice is the same as the other two skeptical experts: No matter how much you love your team, get ready to play hardball at the negotiating table.